City Finance Director Predicts ‘Significant and Prolonged’ Revenue Losses From Pandemic

At today’s meeting, the City Council will hear a downbeat report from Director of Finance Matthew Hawkesworth about the financial prospects of the city predicting “significant and prolonged” revenue losses in the wake of the coronavirus crisis. But Mayor Terry Tornek, in an interview Sunday with Pasadena Now, said the city is, at least for the short term, in relatively good shape when it comes to maintaining current levels of service.

With many businesses shuttered and people living under “Safer at Home” quarantine orders for the last month, and at least until May 15, sales-tax revenues, predictably, have plummeted, pulling the city’s trend lines southward.

Among other negatives, “Transient Occupancy Taxes,” or TOTs, which are paid by hotels, have also nosedived as occupancy has plummeted to between 10 and 15 percent; and the city’s pension obligations to CalPERS will be increasingly strained, as the plan “has realized significant losses over the past month,” the report says.

Hawkesworth, in a memo to City Manager Steve Mermell titled “Long Term Financial Impact of COVID-19 and Financial Market Turmoil,” projects that total general-fund revenue losses (not just from sales taxes) between Fiscal Year 2020 and Fiscal 2021 (which begins July 1) will be $29.7 million – though the net decrease in Fiscal 2020, by itself, will amount to $7.6 million after “underspending compared to the budget” is factored in.

Meanwhile, revenues losses for Fiscal 2021 are projected at $8.5 million, a number mitigated by postponing various capital improvement projects next fiscal year, the memo says.

Between the two fiscal years, that’s a total drop of around $16.1 million. That’s also a key element of the budget dilemmas the council will grapple with in the coming weeks as the deadline for a fiscal 2021 spending plan nears.

Tornek, for his part, said the city can likely ride out the revenue crisis without service cuts so long as businesses can begin to reopen in the shorter term. But if shutdowns are prolonged, the really tough questions would then have to be asked.

 “The loss of sales tax and the loss of TOT basically blows a $15 million hole in the budget, and then you have to adjust expenditures to reflect that if you want to still not be in a deficit condition,’’ Tornek said.

 “The issue really is, how long this goes? What gets opened in May, what gets reopened in June, what’s open in July, what happens to the Rose Bowl? There are a bunch of questions that need to be answered before we can have a more accurate picture of what we’re confronted with for this upcoming year’s budget.

“My guess is, we’ll adopt kind of stand-pat budget in terms of where we are with this year’s budget, contemplate using some reserves in order to maintain services, and if it continues longer than we anticipate, then we’ll have to start talking about service reductions.’’

As to the specific nature of service cuts should business closures and stay-at-home orders be extended, Tornek said, “It’s premature.’’

According to Hawkesworth’s report, some of the big hits to city sales-tax revenues between April and June come from restaurants and hotels (down 60 percent), autos and transportation (down 55 percent), fuel and service stations (down 50 percent), general consumer goods (down 45 percent), and building and construction (down 40 percent).  

Hawkesworth’s numbers predict only single-digit drops in sales-tax revenues in Fiscal 2021. But Paul Little, president and CEO of the Pasadena Chamber of Commerce, told Pasadena Now, “I think that’s optimistic.”

“They’ll be lucky if (the next fiscal year sales-tax revenues are) off anything less than double digits the way things are going now,’’ said Little – a former council member who as head of the Chamber has lobbied the council for more direct aid to local businesses in the form of additional tax rebates and other measures.

The city has already enacted a plan to rebate about $11.4 million to electric customers from its overfunded “underground surtax fund,” which is made up of fees that users are charged to support the construction of underground utility lines. But Tornek, on Sunday, said the city is limited as to how much more deeply it can dig into its pockets, as Little suggests.

“We would quickly drain our resources,’’ Tornek said.

 “We’re going to be facing some extraordinary expenses that we can’t even define yet,’’ the mayor said. “We have debt-service payments that are coming due for the Rose Bowl – I don’t know if they’re going to have any cash to pay for it. Their sources of revenue are shut down. … If the Rose Bowl doesn’t have the money, guess who has to pay for it? We’re not going to default on the debt.’’ 

Tornek also said Pasadena is in a relatively strong position to weather the storm compared to other cities – with Santa Monica being a near-worst-case scenario.

Santa Monica is looking at a budget gap of between $150 million and $225 million, depending on the estimate – and City Manager Rick Cole, a former Pasadena council member and mayor, shockingly resigned on Friday, saying he wanted “to facilitate the restructuring that must take place, knowing we will need to make reductions in staff at every level of the organization.”  

Said Tornek: “Pasadena started off in better financial shape. We had rebuilt our reserves very consciously and conscientiously, we have the Measures I and J (tax streams), and so we had an additional source of income that was giving us a surplus … and the happy planning enterprise we were involved in was, how to spend that surplus in a way that would be most efficient?

“We had settled on a strategy that was going to use it for building the reserves even further, particularly against the pension liabilities and doing additional capital improvement activities with general-fund money.

“That strategy is blown now by this (coronavirus crisis), but we’re still not in a place yet where we have to talk about significant reductions the way Santa Monica and Los Angeles and a variety of other cities are having to discuss.’’

Tornek added: “We’re trying to maintain current levels of service, and I think if this doesn’t go on for too long, I think that may be possible. So, while it’s not an ideal circumstance, we don’t find ourselves in the sort of desperate straits that some communities will.” 

Meanwhile, according to Hawkesworth’s report, money from Measure I – the sales-tax hike passed by voters in November 2018 – is expected to be “$3.9 million lower than the five-year forecast’’ in Fiscal 2021 but still generate $22.3 million next fiscal year. Sales-tax deferments announced April 2 by Gov. Gavin Newsom play a role in the projected drops as well.

Related to that, Measure J funding to the Pasadena Unified School District would also be affected, Hawkesworth’s report said. Under Measure J, also passed by voters in November 2018, PUSD gets one-third of the city’s Measure I money. This year, that was $5 million.

According to Hawkesworth’s report, “The portion of Measure I paid to the Pasadena Unified School District will also be affected as the payments are one third of the cash received by the city. Analysis of the financial impact is underway, but could result in a shift of several million dollars. Both of these measures should not result in a revenue loss to the city for the long-term unless a business were to file for bankruptcy during the 12 months of deferred payments; however, these measures will create annual revenue shifts that will need to be considered when preparing the city’s operating budget.’’

The Hawkesworth memo’s summary parallels Tornek’s thoughts regarding Pasadena’s abilities to roll with the punches … in the short term.

“The city has done well to fully fund general fund reserves and set aside funds for pensions and other costs since the Great Recession,’’ the memo notes. “These reserves put the city in a position of strength to make intentional and calculated decisions over the coming months or years.’’

But it concludes, “total losses will likely be significant and prolonged.’’

The council, still observing “Safer at Home” protocols, is scheduled to meet by videoconference/ teleconference on Monday at 2 p.m. A live stream of the meeting is available at www.pasadenamedia.org or at www.cityofpasadena.net/commissions/agendas.